Art Collecting Is Not Just for the Rich

Walter Manninen read art magazines and started buying paintings in his 20s.

Real estate is in the tank and stocks are lower than they were in 2000, but oil—as in oil paintings—has remained a roaring bull market. Watercolors, too. Indeed, the art market's huge gains of the past seven years must look pretty attractive to anyone with an eye toward diversifying a portfolio with a Josef Albers print or a Franz Arthur Bischoff oil. And while some investors have worried that America's economic slump might spread from subprime to Sotheby's, estimated proceeds of about $1.8 billion at the annual spring auctions in New York offer reason for optimism. The United States may be in a funk, but booms in places like Russia, the Middle East, and Asia have helped keep demand high.

There's no question that the upside of art investing can be way, way up. An untitled Jean-Michel Basquiat painting—purchased by New York collectors Barbara and Eugene Schwartz in 1981 for $3,150—sold at Sotheby's last year for $14.6 million to benefit a museum. If that original amount had instead appreciated in step with the S&P 500, its value would have been about $36,000 in 2007. But for every Basquiat with breathtaking returns, there are thousands—millions?—of paintings sitting bashfully in attics or boastfully on walls, worth even less than some admiring buyer paid for them years earlier. So is it foolishness for the average boomer with some savings and a little spare time to try to buy beauty with the parallel goal of building wealth for retirement?

Not if you ask Walter Manninen, a 53-year-old collector and former executive who now is a senior business adviser in the small-business-development center at Salem State College in Massachusetts. Manninen grew up in the nearby artists' magnet of Cape Ann and began buying art with his grocery money in his early 20s. "I grew up with art in my backyard, but I wasn't born with a silver spoon in my mouth," he says. His purchases—each, in the beginning, no more than $2,000 to $3,000—now are one of his most valuable assets. As investments, his collection has "really outperformed everything," he says, stocks, bonds, and real estate included.

Art's popularity as an investment tool may, in part, have grown out of its success as a hedge against inflation. But any investment professional will tell you it's an ultrarisky asset. That includes Manninen, who has an M.B.A. in finance. He views his purchases, in part, with a banker's eye: Each brings great pleasure, and each adds value. A self-educated collector, he began by reading art magazines and journals, researching artists—and their place in the art world—and scoping out galleries and museums when he traveled. When he buys, he considers elements like a piece's physical condition and chooses works that were created in an artist's prominent medium and subject matter—a landscape painting from a landscape painter, for example. He also relies on the savvy of close advisers.

Manninen's experience offers a key lesson: Art buyers need to do their research if they want their works to appreciate over time. If you walk into a gallery and throw money around, the odds are against your buying a piece that will appreciate. For one thing, the art world is fickle. Contemporary pieces from 20th-century artists like Mark Rothko and Andy Warhol were major sellers last year, with buyers ponying up as much as $73 million for Rothko's White Center. But next year's tastes would be tough to predict.

There are many other variables that contribute to the value of a piece, including its provenance, its condition, and the sales history and experience of the artist. The Internet has made it much easier to track down many of those details and be an educated collector.

There are some unexpected drawbacks in the form of additional costs for things like insurance, climate-controlled storage, maintenance and cleaning, auction buyers' premiums (generally between 10 and 25 percent), and taxes. Liquidity is always an issue when it comes to art, and a recession may even make it worse, as some buyers drop out of the market for a time. Manninen, however, sees that as a "perfect opportunity" to buy American art in a down market.

Alternative. The slowdown so far seems to have had minimal negative effect on the art market. It may even be encouraging more participants. In England, the Royal Institution of Chartered Surveyors reports that art and antique prices were up in the first quarter, largely because the "volatility of the financial markets appears to be encouraging consumers to switch to alternative investment opportunities." The high end of the market is particularly strong, while lower-end collectors may be reining in some of their spending.

Last year was the seventh consecutive year of price appreciation, Artprice said in its annual art market report. Total fine art market revenue soared 44 percent to $9.2 billion in 2007, "a veritable annus mirabilis for the art market," Artprice said. Sotheby's held a record-breaking $316 million sale in November, and the Mei Moses art index, which tracks a limited number of art auction resales, shows returns grew by more than 20 percent in 2007, which aligned the year with those of the "art bubble years" between 1984 and 1990. But some art-world insiders expect the slowdown will make its mark: Andy Augenblick, president of Emigrant Bank Fine Art Finance, which makes art-secured loans, recently predicted that financial pressures might force some collectors to sell. Artprice reports that prices may have hit their ceiling in 2007.

Art as an investment is still a very new phenomenon. "Traditionally, it was a few people who collected art," says Peter Scott Sahlman, owner of New York art consultancy Sahlman Fine Art. "Art collecting was kind of an esoteric hobby. Now, wealthy people all collect art. It's a social function, too, especially in contemporary art."

Art should make up roughly 5 percent of an overall portfolio, Sahlman says. (Indeed, the Mei Moses index has slightly underperformed stocks over the past 50 years.) The ballpark allocation could increase for someone with a huge fortune. It depends on how much an investor needs access to his or her money, Sahlman says. Art, after all, can't be sold as easily or cheaply as stock.

For art's sake. If all this talk about quantifying art sounds crass, rest assured that some collectors still want nothing to do with profits. New Yorkers Dorothy and Herbert Vogel have become icons in the art community for their landmark collection built through many purchases of reasonably priced minimalist, conceptual, and other contemporary works. The couple—he a retired postal clerk and she a former public librarian—began collecting shortly after they married in 1962.

All told, the Vogel Collection totals more than 4,000 drawings, paintings, sculptures, prints, and photographs. The couple's collecting slowed down only five years ago, Dorothy Vogel says. About 2,500 of the Vogels' works are now being given to museums in each of the 50 states. The National Gallery of Art, which is helping to distribute the collection, won't disclose its value, but it "really has no meaning" anyway, says Vogel, who bristles at the term investing. The couple purchased art to please themselves, she says.

Still, Vogel has advice for would-be collectors who don't have millions to pour out at auction. She suggests starting small with prints and drawings and collecting local artists. "We had no rules," she says. "If it was too big, we couldn't buy it. If it was too expensive, we couldn't buy it." Art should, after all, be a good fit for your budget and your home.